Make the most of debt – notes on offshore money making and fish farming

From Arran resident and Voice reader Rory Cowan, who has been wondering how relevant Jersey is to Scottish Salmon farming…

How to get rich – well, … richer….. MAKE THE MOST OF DEBT

It is worth noting that for the rich, debt is a very useful thing – in fact it’s like gold dust – no it is
gold dust. It does not attract tax and can be used to offset tax in a very tax efficient way. This is
a ‘high level’ view of how it can work.

Set up a shell company in a tax efficient place – these often used to be referred to as tax havens.
Borrow a suitable amount of money into the shell company at a competitive rate – say 3% – well
heeled people and their friends are good at providing this better still dl it with your own money. At
the same time or in similar time frame, set up a trading company.

Now the trading company will need capital, so it looks around for a suitable lender – which,
possibly could just be a company in a tax haven that will lend at a reasonable but fairly high rate
commensurate with the risk that its shareholders are prepared to take – say 15%. The
shareholders may even be the same people…….

So the trading company is developed to produce goods, funded by the offshore company and
paying interest only on the loan. The company grows and trades and most of its profits – or what
would be its profits – are swallowed up in the interest payments, so whilst the company trades
well and but for the eye watering interest rate, it would be very profitable.

The offshore company borrowing at a low interest rate and lending at a high interest rate thus
makes loads of money which is taxed at the rate levied by the tax haven – ie not a lot. Thus the
trading company washes its face and does not make a lot of money in the jurisdiction in which it
is set up, but the shell company offshore can make huge profits taxed at the offshore rate – which
it can pass on to its shareholders who may just live offshore as well…..

So what happens when the trading company and its assets get ‘old and tired’, well the offshore
shell company suddenly calls in its loan thereby forcing the trading company into liquidation and
in seeking to meet its commitments, surrenders its assets against the loan capital outstanding,
which in the case of a forced sale does not meet the debt. So the offshore shell fails to recover its
loan in full thereby enabling the shell to enjoy a tax rebate.

What happens to the assets of the trading company seized in lieu of capital paid back – well they
have been seized at forced sale value by the offshore shell and of course they can be recycled for
use when setting up a new trading company. These will of course be sold at full market value to
the new company – which of course has borrowed at that magic 15% from the offshore shell.
So the moral of this tale is that when dealing with over complex matters with regard to offshore
and onshore companies, look for the tax advantages of debt, and the trading company is likely to
yield little tax to the jurisdiction in which it operates.

So for the tax man – be aware that trading companies funded from offshore just might not yield as
much revenue to HMRC as you might think…….

The principle is simple – doing it is more complex – but possible.

And in the light of the above from Rory, this from the BBC on 25th September about the recent takeover of The Scottish Salmon Company, who are currently applying to North Ayrshire Council for permission to grow their business with a fish farm in the waters in the north of Arran.

By Douglas Fraser, Business and economy editor, Scotland

The Scottish Salmon Company is being bought over by a firm in the Faroe Islands, for more than £500m.
Bakkafrost has agreed to take on 69% of the shareholding from the current majority owner, investment fund Northern Link. That fund is reported to be backed by a Ukrainian investor. The Faroese firm is issuing a mandatory offer for the remaining freely traded equity, forcing those shareholders to sell. The total cost is £517m.

The Scottish Salmon Company (SCC) is one of the three biggest producers of farmed salmon in Scottish waters, operating at 60 sites and with more than 600 workers. The deal means the company will be de-listed from trading on the Oslo stock exchange, saving some costs at the Edinburgh headquarters. The new owner expects there will be significant savings from supplying its own fish food to SSC farms.

The Edinburgh firm, founded in 2009 and registered in Jersey, claims to have an advantage over its rivals through exclusive access to the genetics of the Native Hebridean Salmon. It says this is stronger, leaner and firmer than the more commonly-farmed Atlantic salmon.

SCC had a harvest of nearly 30,000 tonnes last year, or 22% of total Scottish production. That was less than Mowi, formerly Marine Harvest, and just ahead of Scottish Seafarms. SCC has had more than 18,000 tonnes harvested in the first half of this year, with capacity of up to 50,000 tonnes per year. Nearly two-thirds of its output is exported, to 26 countries.

With revenue of more than £180m last year, earnings before interest and tax last year were £57m, and nearly £36m in the first half of this year.

Earlier this year, it set out a £10m investment programme for freshwater facilities, including a fish hatchery and smolt tanks at two sites near Applecross in Wester Ross. It also owns the Harris & Lewis Smokehouse.

Last April, SCC announced a strategic review, considering options of either returning capital to shareholders, or acquiring other assets to grow, or looking for a partner that could move it into wider markets, including Asia.